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First-Party Property Insurance
November 3, 2014
>> Law Alert
>> Editors
John W. Carver, Partner
in the Chicago Office
>> Introduction:
In this month’s First-Party Property Insurance Law Alert, we take a look at two distinct issues related to first-party
property coverage. First, Todd Schenk and Ann O’Connor analyze two cases, both addressing whether documents/
communications prepared by counsel prior to litigation are discoverable, that have two different outcomes. Next,
Paul S. White and Todd M. Rowe examine the potential impact that the current Ebola outbreak may have on
first-party property coverage. This article, entitled, “Initial Impact of the Ebola Virus on First-Party Property
Insurance Coverage,” was first published in Advisen’s Risk Network on October 23, 2014.
Are Documents Prepared by Counsel and Communications
with Counsel Generated Before Suit Privileged? It Depends.
Todd S. Schenk, Partner
in the Chicago Office
Paul S. White, Partner
in the Los Angeles Office
Authored by: Todd S. Schenk, Partner in the Chicago Office and Ann O’Connor, Associate in the Chicago Office
Insurers frequently retain counsel prior to making a coverage determination with respect to first-party property
claims. However, the privileges and protections afforded documents that those attorneys prepare and the
communications shared between the insurer and its counsel during the pre-litigation claim adjustment phase
have been the subject of much debate. Two recent decisions, one from a New York state court and one from
a Washington federal court, come down on opposite sides of discovery disputes over such documents. In both
cases, documents and communications that relate to the attorney’s opinions regarding the insurer’s liability, as
well as legal advice regarding coverage, will continue to be protected. On the other hand, these cases also suggest
that, where attorneys are perceived as conducting the claim adjustment and investigation themselves, their
documents and communications may not be protected.
New York State Court: Claim Investigation Documents Prepared Prior to
Denial Are Discoverable, Regardless of Attorney Involvement
Todd M. Rowe, Associate
in the Chicago Office
In National Union Fire Insurance Co. of Pittsburgh, Pa.
v. TransCanada Energy USA, Inc., 114 A.D.3d 595, 981
N.Y.S.2d 68 (N.Y. App. Div. 1st Dep’t Feb. 25, 2014),
the Appellate Division in Manhattan upheld the lower
court’s rejection of the insurers’ claims of privilege
for documents generated by outside counsel involved
in the insurers’ pre-denial claim investigation.
Instead, the court compelled production of all such
documents, finding that they constituted part of the
insurers’ ordinary business activities, despite the
attorneys’ involvement.
This case arose out of a 2008 failure of a generator
turbine at a Ravenswood power plant in Queens, New
York. TransCanada sought insurance coverage from
three first-party property insurers for resulting repair
costs and business interruption losses. Following the
loss, the three insurers hired attorneys to investigate the
claims and assist them in their coverage determination.
The insurers ultimately denied coverage in June and July
2010. Prior to the denial, the attorneys prepared reports
summarizing the results of their claims investigation.
The insurers objected to production of communications
among the insurers and their joint counsel prior to the
denial, on the grounds that they contained attorneyclient privileged legal advice and were protected from
disclosure under the common interest doctrine.
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The lower court reviewed the documents in camera,
and concluded that the documents that pre-dated
the insurers’ decision to deny coverage were not
privileged, as the attorneys were coordinating the
insurers’ investigation and were involved in core
investigative activities, including retaining expert
consultants to evaluate the claim. The court found
that work product immunity did not apply to such
documents, as that protection relates to documents
prepared in anticipation of litigation, but an insurer
“cannot claim documents are prepared in anticipation
of litigation until it makes a firm decision to deny
coverage.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.
v. TransCanada Energy USA, Inc., Nos. 650515/10,
400759/11, 2013 NY Slip Op 31967(U), at 11 (Sup.
Ct. N.Y. Cty., Aug. 15, 2013). Additionally, the court
explained that attorney-client privilege is limited to
communications made “primarily for the purpose
of furnishing legal advice.” Id. at 7. Documents that
pertained solely to gathering factual material about
the loss prior to the denial of coverage were ordinary
claims adjustment activities, rather than legal work.
On the other hand, the court acknowledged that
“[d]ocuments may constitute privileged attorneyclient communications, even if made before the
insurance company decides to deny coverage,
provided that they are primarily of a legal character,
and not related to an insurance company’s ordinary
business activities.” Id. at 8 (emphasis added).
The lower court also rejected the common interest
doctrine claim, as it found that “insurance companies
must decide to deny coverage before they may invoke
the common interest privilege and protect their
communications with third parties from disclosure.”
Id. at 10. Again, the court concluded there can be no
reasonable anticipation of litigation until an insurer
makes a “firm decision to deny coverage.” Id.
On appeal, the First Department affirmed the lower
court’s decision, finding “[d]ocuments prepared in
the ordinary course of an insurer’s investigation of
whether to pay or deny a claim are not privileged,
and do not become so merely because [the]
investigation was conducted by an attorney.” Id. at
596 (quoting Brooklyn Union Gas Co. v. Am. Home
Assur. Co., 23 A.D.3d 190, 191, 803 N.Y.S.2d 532 (N.Y.
App. Div. 1st Dep’t 2005)) (quotations omitted).
Further, the First Department agreed that the
common interest doctrine was not applicable “since
there was no pending or reasonably anticipated
litigation in which the insurance companies had a
common legal interest.” TransCanada, 114 A.D.3d at
595-96. (Of note, the court issued a revised opinion
on July 31, 2014, removing its discussion of the
common interest doctrine, and noting that it need
not reach that question because the documents
were not privileged in the first instance, so it was
irrelevant whether disclosure was made pursuant to
a common interest. National Union Fire Ins. Co. of
Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 119
A.D.3d 492, 493, 990 N.Y.S.2d 150 (N.Y. App. Div. 1st
Dep’t July 31, 2014)).
TransCanada is generally in keeping with New
York’s position that an insurer’s investigation and
determination as to whether to pay or deny a claim
is a part of the insurer’s ordinary-course business
activities. Melworm v. Encompass Indem. Co., 112
A.D.3d 794, 794 (N.Y. App. Div. 2d Dep’t 2013). As
such, documents generated by attorneys in the
course of the claims adjustment process, which
aid the insurer in determining coverage, are not
considered privileged unless they are “primarily and
predominantly of a legal character.” Id.; see also Belfer
v. Travelers Ins. Co., No. 100603/11, 2014 NY Slip Op
31980(U), at 2-3 (Sup. Ct. N.Y. Cty., July 25, 2014)
(citing TransCanada and noting that “documents
prepared in ordinary course of insurer’s investigation
of whether to pay or deny claim not privileged, even
if investigation conducted by attorney”).
>> Comments by Tressler
Significantly, while insureds may see the TransCanada decision as creating a bright-line rule, the New York courts
placed considerable emphasis on both the nature of the documents involved and the insurers’ reasonable
expectation of litigation, carefully analyzing the facts of the case and undertaking an in camera review to assess
the documents involved. Therefore, to the extent attorneys are providing legal advice to insurers, or to the extent
an insurer reasonably anticipates litigation will result from its coverage determination, documents prepared by
counsel and communications between insurers and their attorneys will continue to be protected.
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Washington Federal Court: Pre-Denial Communications Between Insurer
and Its Counsel Protected, as Long as It Is Clear That Privilege Applies
In MKB Constructors v. Am. Zurich Ins. Co., No. C13-0611,
2014 U.S. Dist. LEXIS 78883 (W.D. Wash. May 27, 2014),
the District Court followed federal law, rather than
Washington state court precedent, to find the insurance
company had established that work product protection
applied to documents prepared by subrogation counsel.
With respect to the attorney-client privilege, the court
applied precedent from the Washington Supreme Court
to conclude that the attorneys were not engaged in
investigative activities, so their communications with
the insurers were not discoverable.
MKB Constructors arose out of MKB’s work on a new
school building. MKB’s contract to construct a building
pad and driveway on which the school would be built
was terminated after MKB discovered that the ground
beneath the building pad had settled significantly and
the planned volume of fill set forth in the contract
would fail to reach the necessary grade. MKB sought
coverage under its first-party property insurance, but
the insurer denied the claim.
MKB brought a motion to compel the production of
documents that the insurer withheld or redacted on
the basis of the attorney-client privilege and work
product doctrine. The insured was specifically seeking
production of documents prepared by the insurance
company’s subrogation counsel, as well as the insurer’s
communications with its coverage attorneys.
The District Court cited to the applicable Federal Rule
governing disclosure of otherwise-protected work
product, Fed. R. Civ. P. 26(b)(3)(A)(ii), and also noted
that, in the Ninth Circuit, an insured may be able to
obtain opinion work product where claims of bad faith
are involved, but that determination is made on a “caseby-case basis.” MKB Constructors, 2014 U.S. Dist. LEXIS
78883, at *9. For non-opinion work product, however,
the insured must show that the mental impressions in
that work product “are at issue and their need for the
material is compelling.” Id. (quoting Holmgren v. State
Farm Mut. Auto. Ins. Co., 976 F.2d 573, 577 (9th Cir.
1992)) (emphasis in Holmgren).
The District Court also discussed a 2013 Washington
Supreme Court decision, Cedell v. Farmers Insurance
Co. of Washington, 176 Wn.2d 686, 295 P.3d 239
(Wash. 2013), in which the court significantly altered
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the attorney-client privilege in the context of firstparty bad faith claims. In that case, the Washington
Supreme Court created a “presumption that there is no
attorney-client privilege relevant between the insured
and the insurer in the claims adjusting process, and
that the attorney-client and work product privileges
are generally not relevant.” Cedell, 295 P.3d at 246. An
insurer may overcome that presumption by showing
its attorney “was not engaged in the quasi-fiduciary
tasks of investigating and evaluating or processing the
claim, but instead in providing the insurer with counsel
as to its own potential liability; for example, whether
or not coverage exists.” Id. An insurer may make this
showing through in camera review of the documents
in question.
However, the District Court in MKB Constructors
explained that, a federal court sitting in diversity, it
must apply federal procedural law. MKB Constructors,
2014 U.S. Dist. LEXIS 78883, at *16 (citing Erie R.R.
Co. v. Tompkins, 304 U.S. 64, 78-79, 48 S. Ct. 817,
82 L. Ed. 1188 (1939)). Thus, although the Cedell
pronouncements regarding attorney-client privileged
communications apply, the Cedell requirements
regarding in camera review do not. Id. at *18, *23.
Further, federal law governs the applicability of the
work product doctrine. Id. at *25; see also Johnson v.
Allstate Prop. & Cas. Ins. Co., No. C14-5064, 2014 U.S.
Dist. LEXIS 121342 (W.D. Wash. Aug. 29, 2014) (citing to
MKB Constructors and reaching the same conclusions
regarding the applicability of Cedell); Anderson v.
Country Mut. Ins. Co., No. C14-0048, 2014 U.S. Dist.
LEXIS 118400 (W.D. Wash. Aug. 25, 2014) (same).
Therefore, in assessing the work product doctrine, the
court considered Fed. R. Civ. P. 26(b)(3) and applicable
federal case law. It found the insurer met its burden
under federal law to show that the communications
with its subrogation counsel should be withheld
because subrogation activity anticipates litigation
“through its very purpose,” and MKB did not make a
showing of either a “substantial” or “compelling” need
for those documents. MKB Constructors, 2014 U.S.
Dist. LEXIS 78883, at *28-29.
The insurer also met its burden to show the attorneyclient privilege applied to documents created by the
claim adjuster about a conference call with coverage
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counsel. There was no indication coverage counsel had
engaged in any investigative functions, such as taking
witness examinations under oath. Thus, the court found
the insurer successfully overcame Cedell’s presumption
of discoverability by establishing that the attorney was
not involved in the claim adjusting process. Id. at 29-31.
The court also explained that a claim of bad faith alone
does not overcome the privilege, as the insured must
also make a showing that the insurer engaged in “an
act of bad faith tantamount to civil fraud,” but MKB had
not made such a showing. Id. at 31-32 (citing Cedell,
295 P.3d at 246-47).
>> Comments by Tressler
MKB Constructors offers significant clarification of the Washington Supreme Court’s precedent in Cedell. Although
Cedell seemed to create a bright-line rule regarding the discoverability of adjustment-related documents, despite
the involvement of counsel, MKB Constructors limits the application — particularly in the context of federal cases.
This decision may lead to venue-related disputes in Washington, as insurers will seek to remove cases to federal
court to avoid the overreaching discovery presumptively available in Washington state court, whereas insureds
will seek to proceed in state court. However, even in state court, it seems Cedell does not completely dissolve
protections for adjustment-related communications between insurers and their coverage counsel, as long as it
can be shown that the attorney was engaged in offering legal opinions and advice, rather than claim adjustment.
Initial Impact of the Ebola Virus on First-Party Property
Insurance Coverage
Authored by: Paul S. White, Partner in the Los Angeles Office and Todd M. Rowe, Associate in the Chicago Office
(Article first published in Advisen’s Risk Network on October 23, 2014)
INTRODUCTION
On September 30, 2014, the “first laboratory-confirmed
case of Ebola to be diagnosed in the United States” was
found in an individual who had traveled to Dallas, Texas,
from West Africa. The person did not have symptoms
when leaving West Africa, but developed symptoms
approximately four days after arriving in the United
States1. Two of his nurses subsequently tested positive
for Ebola. Other U.S. aid workers who contracted Ebola
while treating Ebola patients in West Africa have also
been returned to the U.S. for treatment.
In the wake of these confirmed U.S. Ebola cases,
the Centers for Disease Control (CDC), the media,
employers, government agencies and the public at
large have, in somewhat of a frenzy, tried to grasp what
the consequences are and what this means to them.
Predictably, measures have been taken to prevent the
further spread of this virus. On October 13, 2014, the
CDC asked 132 passengers on a Frontier Airlines flight
traveling from Cleveland, Ohio, to Dallas/Fort Worth,
Texas, to monitor their health when a healthcare
worker began showing Ebola symptoms while on the
1 http://www.cdc.gov/vhf/ebola/outbreaks/2014west-africa/united-states-imported-case.html
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flight2. Schools have been closed. Patients have been
quarantined. Individuals who have been potentially
exposed to Ebola given their proximity to Ebola patients
have been quarantined. Apartment buildings have
been put on lock down. Remediation and sterilization
measures have been taken in private and public
buildings. A cruise ship was diverted and returned to
port while its passengers were monitored for Ebola.
Multiple flight passenger lists have been scrutinized to
determine whether Ebola has spread. A U.S. dog was
tested for Ebola while a Spanish dog was put down after
his nurse-owner contracted the virus. While the current
Ebola outbreak may not be considered a “pandemic”
at this time, there is no dispute that it is the deadliest
Ebola outbreak on record. “This epidemic is without
precedent,” said Bart Janssens, director of operations
for Doctors Without Borders. “It’s absolutely not under
control, and the situation keeps worsening. …There are
many places where people are infected but we don’t
know about it.”3
2 http://www.cdc.gov/media/releases/2014/s1015airline-notification.html
3 http://www.cnn.com/2014/03/27/world/ebolavirus-explainer/
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THE CURRENT EBOLA OUTBREAK
Ebola, once known as “Ebola hemorrhagic fever,” was
first discovered near the Ebola River in what is now
the Democratic Republic of the Congo in 1976. And,
until recently, outbreaks were confined to countries
in Africa.4 A high percentage of those infected with
Ebola will die as the disease interferes with an
individual’s immune system. As Ebola progresses, it
can cause organ failure; severe bleeding; jaundice;
delirium; seizures; coma; and shock.5 The Ebola
virus is designated as a “Category-A” virus by the
CDC because of its high mortality rates and ease of
transmission. See, Allen v. NIH, 2006 U.S. Dist. LEXIS
97356, 2-3 (D. Mass. Oct. 20, 2006). At present,
the CDC has classified the West African countries
concern of infection.7 Infected people typically are not
contagious until they develop Ebola symptoms.
Over the last couple of decades a number of disease
outbreaks—including bird flu, swine flu, MERS, and
SARS, have threatened society and commerce. We have
also seen threats from manmade substances including
anthrax and smallpox. One common characteristic
among these outbreaks and bioterrorist attacks has
been the danger posed by the fact that these threats
could spread through the air. Ebola is not an airborne
disease and it can only be transmitted through direct
contact of broken skin or mucous membranes with
bodily fluids of the infected patient: blood, sweat, tears,
saliva, vomit, stool, urine, breast milk and semen. In
short, the possibility of contracting Ebola is extremely
low without having contact with the body fluids of an
infected person or animal.
POSSIBLE CLAIMS UNDER FIRST PARTY
PROPERTY POLICIES
of Guinea, Liberia and Sierra Leone as “countries
with widespread transmission.”6 Nigeria, Spain and
the United States are classified as “countries with
localized transmission.”
There is no FDA-approved vaccine available for Ebola.
The CDC recommends the best protection against Ebola
is through good hygiene, not coming into contact with
items that have come into contact with an infected
person, and, to monitor anyone for 21 days if there is a
4 http://www.cdc.gov/vhf/ebola/about.html
5 http://www.mayoclinic.org/diseases-conditions/
ebola-virus/basics/complications/con-20031241
6 http://www.cdc.gov/vhf/ebola/outbreaks/2014west-africa/distribution-map.html#areas
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The nature of a property insurance policy is to
provide an insured with benefits for accepted risks
of loss, in exchange for the receipt of premiums.
Property insurance policies generally insure either
(1) “all risks” of physical loss unless perils are
specifically excluded; or (2) “named perils” such as
losses from specifically identified causes, e.g., fire or
earthquake. The typical “all-risk” policy begins with a
broad insuring provision which states that the policy
covers “direct physical loss or damages to Covered
Property.” The insurer then specifies which risks
it will not assume by listing those causes of loss as
policy exclusions. See, Mutual Fire Ins. Co. of Calvert
County v. Ackerman, 872 A.2d 110 (Md.App.2005);
Morgan v. Auto Club Family Ins. Co., 899 So.2d 135
(Md.App.2005); Garvey v. State Farm Fire & Cas. Co.,
48 Cal. 3d 395, 406, 770 P.2d 704 (1989); Jordan v.
Allstate Ins. Co., 116 Cal.App.4th 1206 (2004). In
other words, “the insurer promises to pay money to
the insured upon the happening of an event, the risk
of which has been insured against.” Montrose Chem.
Corp. v. Admiral Ins. Co., 10 Cal.4th 645 (1995); H.
Walter Croskey & Ron Heeseman, California Practice
Guide: Insurance Litigation § 6:200 (The Rutter Group
2004). The property insurer covering the insured
risk when property damage first manifests itself is
generally the insurer solely responsible for the loss,
even if property damage continues after the insurer’s
7 http://www.cdc.gov/vhf/ebola/prevention/index.
html
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policy expires. See, e.g., Prudential-LMI Commercial
Ins. Co. v. Superior Court (Lundberg), 51 Cal. 3d 674,
679, 274 Cal. Rptr. 387, 404 (1990); Allstate Ins. Co.
v. Quinn Constr. Co., 713 F. Supp. 35 (D. Mass. 1989),
opinion vacated, 784 F. Supp. 927 (D. Mass. 1990);
Cohen v. North Am. Life & Cas. Co., 150 Minn. 507
(Minn. 1921); Jackson v. State Farm Fire & Cas. Co.,
108 Nev. 504 (Nev. 1992). A minority of jurisdictions,
however, may consider when damage first began
as opposed to when it first became manifest. Kief
Farmers Coop. Elevator Co. v. Farmland Mut. Ins.
Co., 534 N.W.2d 28, 35-36 (N.D. 1995); Ellis Court
Apartments Ltd. P'ship v. State Farm Fire & Cas. Co.,
72 P.3d 1086 (Wash. Ct. App. 2003).
Potential for Direct Physical Loss
Caused by a Pandemic
First-party property claims require direct physical
loss to the property and proof of causation. Property
policies require that the loss at issue result from
“direct physical loss or damage.” For example,
California courts have concluded that this phrase
requires “direct” loss, and as such encompasses only
physical harm to the covered property. “Direct” loss
does not include consequential or resulting economic
loss bearing a more attenuated connection to the
covered cause of loss. Id. Similarly, California courts
have concluded that the phrase “direct physical loss”
also requires a “physical” loss. Id.; Ward General Ins.
Servs., Inc. v. Employers Fire Ins. Co., 114 Cal.App.4th
548, 554, 556 (2003). “Physical” loss requires the
loss of tangible property. Ward, 114 Cal.App.4th at
554, 556.
The predominant and most anticipated issue is
whether the impact of an Ebola outbreak would
constitute a direct physical loss or damage as defined
under a first-party property policy. Policyholders may
have difficulty arguing that an Ebola outbreak is similar
to traditional “perils” such as a fire or earthquake. As
it stands presently, research indicates the Ebola virus
will have little or no impact on physical property. As
discussed above, transmission of the Ebola virus is
limited to the extent that it cannot move through the
air or water. Rather, at this point, it appears the Ebola
virus can only be transmitted through contact with
an infected person. This characteristic may limit the
chances for the Ebola virus to be considered a “peril”
as defined under the typical first-party property policy.
During prior pandemics, such as the Bird or Swine Flu,
the virus was transmitted by air. Consequently, there
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was at least a chance that those viruses could be found
on and altered physical property in some manner.
Of course, while the Ebola virus does not presently
appear capable of altering physical property, there
is research indicating “secondary impacts” from
a pandemic could result in property damage.8 For
example, if a pandemic taxes emergency services
in a particular community, there is a greater chance
fires will take longer to extinguish, which in turn,
could cause more property damage. Costs to repair
property damage may increase which may cause
people to stop repairing their property as well as
drive up repair costs for insurers responding to
a claim under a first-party policy. Consequently,
while an Ebola outbreak may not create direct
property damage, policyholders may attempt to link
secondary impacts to their damaged property.
Even if the Ebola outbreak does not take hold in the
U.S., business interruption coverage may also extend
to temporary closures of U.S. businesses due to
Ebola outbreaks impacting “dependent properties,”
such as a major supplier to the policyholder. A
policyholder’s suppliers may be shutdown if they
are in a location where Ebola has impacted the local
community and disrupted the supply chain. Possible
claims arising from businesses being disrupted carry
the specter of touching nearly every type of business
where people interact.
The economic effects of a pandemic could be
devastating, says Laurie Garrett, a senior fellow for
global health at the Council on Foreign Relations in
New York City whose article on the subject is in the
July/August issue of Foreign Affairs.
The airlines and travel industry would feel the hit first,
predicts Garrett, who is the author of the book “The
Coming Plague: Newly Emerging Diseases in a World
Out of Balance.”
She says that international trade might then dry up
as frantic governments try to shut down their borders
to prevent spread of the disease. Essential imported
goods, such as raw materials, medicines and certain
foods, would become suddenly unavailable. As the
pandemic progresses, schools and day care centers
would be almost certain to shut down.
8 http://www.lloyds.com/~/media/Lloyds/Reports/
Emerging%20Risk%20Reports/ER_Pandemic_
InsuranceImpacts_V2.pdf
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“Parents will stop coming in to work to stay home and
take care of their children,” Garrett says. “Business
will grind to a halt all over the place. What if the
supermarkets stop being stocked? What if you can’t
get milk?”9
Consequently, there is still an opportunity for
insurance claims under first-party property policies
regardless of whether an Ebola pandemic creeps into
the United States on a measurable scale.
Pandemics Can Have “Concurrent
Causes” of the Damage
First-party cases may involve losses that result from
more than one concurrent cause—property damages
accentuated by the aftermath of the event causing
the property damage. Relative to causation, there are
two schools of analysis currently employed by courts
across the country. A minority follows the doctrine of
concurrent causation where coverage is afforded so long
as a covered cause of loss contributes in a meaningful
way to the insured’s damages. In jurisdictions that
follow a “concurrent cause” analysis, coverage is
allowed whenever two or more causes contribute to
a risk and at least one of the causes is covered under
the policy. It is completely unnecessary to determine
exactly which event occurred first or even the degree
9 Kristin Choo, The Avian Flu Time Bomb, 91 A.B.A. J.
36, 40 (2005).
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to which the various causes of loss contributed. So long
as a covered cause of loss appreciably or meaningfully
contributes, and is not remote or tenuous in nature,
then the insurer must find coverage under the policy.
Concurrent causation analysis utilizes a “but for”
analysis that is akin to the “direct causation” theory
employed in tort law. See, e.g., Ang v. Martin, 114 P.2d
637 (Wash. 2005); Hurd v. Williamsburg County, 611
S.E.2d 488 (S.C. 2005). If the damages would not have
occurred “but for” the contribution of a covered cause
of loss, then there is coverage on the claim. This is the
case even if there are multiple contributing causes that
are clearly excluded under the policy.
By contrast, the majority of jurisdictions employ the
doctrine of efficient proximate cause. In these states,
coverage is afforded if the predominant cause of the
loss is a covered cause of loss. Just as concurrent
causation is akin to the “but for” theory in tort law,
the doctrine of efficient proximate cause is more
analogous to the proximate or legal causation analysis
in tort law. See, Palsgraf v. Long Island R. Co., 162 N.E.
99 (N.Y. 1928). “Efficient proximate cause” means
the “predominating cause of the loss,” or the most
important cause of the loss. Garvey, 48 Cal.3d at 403.
The “efficient proximate cause” need not be the first
or immediately cause of loss. Id.; See also Murray v.
State Farm Fire & Cas. Co., 509 S.E.2d 1 (W.Va. 1998).
Under this doctrine, once the “predominant” cause of
the loss is identified, coverage turns on whether it is
a covered or excluded cause of loss under the policy.
If that predominant cause is excluded, then the entire
claim may be excluded, even if there are covered
events that contributed along the chain of events.
Catastrophic events present ample opportunity for
property damage to result from “concurrent causes.”
For example, in the aftermath of Hurricanes Katrina
and Rita in 2005, the various business interruption
losses from the storms had two independent,
concurrent losses. First, many businesses suffered
physical losses when property was damaged. However,
these physical losses gave rise to additional losses
when authorities declared a state of emergency which
shut down New Orleans. Therefore, policyholders
argued they sustained losses from the storms as well as
separate loss from the impact of the storms. We could
see a similar situation related to an Ebola outbreak if
authorities prohibit access to a policyholder’s property
due to an Ebola outbreak at a neighboring property.
For example, storekeepers may suffer a business
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interruption if their store is located in or near a store
where an outbreak occurred. Consequently, business
owners’ financial losses from property damage can
be increased by mandatory evacuations, curfews or
mass hysteria driving away any hope of business after
a pandemic.
Pandemics May Cause “Business
Interruption” as Defined Under FirstParty Policies
In the case of a pandemic event, policyholders would
be expected to look to the “business interruption” or
“business income” coverage under first-party property
policies to recoup financial losses. “Commercial
property insurance covering loss of income suffered by
a business when damage to its premises by a covered
cause of loss causes a slowdown or suspension of its
operations. Coverage applies to loss suffered during
the time required to repair or replace the damaged
property. It may also be extended to apply to loss
suffered after completion of repairs for a specified
number of days.” 10
In order to trigger business interruption coverage
under a property policy, a policyholder must sustain
a loss in business after suffering a direct physical
loss attributable to a covered “peril” under policy.
Commentators11 have already began to note that
10http://www.irmi.com/online/insurance-glossary/
terms/b/business-income-coverage.aspx
11http://www.carriermanagement.com/
news/2014/10/17/130528.htm
www.tresslerllp.com
while the current Ebola outbreak may cause business
interruption, there are serious questions as to whether
there will be direct physical loss to trigger coverage:
Business interruption is most likely to occur in mining,
agricultural, energy, chocolate and travel sectors that
have a strong presence in the affected West African
countries,” the Boston-based catastrophe-modeling
firm said in a recent media advisory. However, it is
unclear what, if any of these losses are covered by
existing insurance policies, especially since business
interruption policies typically require physical damage
to a location.
In a decision that could provide some guidance as to
how courts may interpret the coverage issues related
to a pandemic event, the U.S. Court of Appeals for
the Eighth Circuit addressed whether a plaintiff
could recover the loss of business income resulting
from an embargo on beef products due to “mad cow
disease.” In Source Food Tech., Inc. v. U.S. Fidelity &
Guar. Co., No. 06-1166 (8th Cir. Oct. 13, 2006), the
insured argued that the closing of the border to
imported beef product caused direct physical loss
to its beef product because its beef product was
treated as though it were physically contaminated by
mad cow disease and lost its function. The insured
relied on Gen Mills, Inc. v. Gold Medal Ins. Co., 622
N.W. 2d 147 (Minn. Ct. App. 2001) and Marshall
Produce Co. v. St. Paul Fire & Marine Ins. Co., 98
N.W. 2d 280 (Minn. 1959) to support its position
that the impairment of function and value of a food
product caused by government regulation is a direct
physical loss to insured property. The Eighth Circuit
found that those cases were distinguishable and
that coverage in those cases was triggered by actual
physical contamination of insured property. However,
the Eighth Circuit found that Source Food’s inability
to transport its truckload of beef product across
the U.S.-Canadian border did not constitute product
that was physically contaminated or damaged in any
manner and to characterize an inability to transport
such beef product across the border would render the
word “physical” meaningless. Consequently, the court
granted summary judgment in favor of an insurer on
the plaintiff’s breach of contract claim on the basis
that Source Food did not experience direct physical
loss to property.
And, those seeking coverage for the effects of a
pandemic will not be limited to the owner of the
property. Several entities, including various property
owners, mortgagees or tenants all may have an
CALIFORNIA | ILLINOIS | NEW JERSEY | NEW YORK
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First Party Property Insurance >> Law Alert
November 3, 2014
Continued from page 9
insurable interest in the property impacted by an
Ebola outbreak.
From a practical standpoint, it may be difficult to
envision a scenario where a pandemic would give
rise to a peril under a property policy. However, as
seen with large scale tragic events in the past, there
will be a search for deep pockets if businesses are
forced to cease operations during a pandemic event.
As some commentators have observed: “One of the
distinguishing elements of a pandemic versus other
types of business interruption is that pandemics will
result in the temporary – and in some case permanent
– loss of human capital . . .” Mark A. Hofmann,
“Government Releases Pandemic Plan, Employers
to Play a Key Role in Fight Against Avian Flu Threat,”
Business Insurance, May 8, 2006. This “loss of human
capital” may result from the quarantined employees or
customers, fearful employees or customers or, in the
worst case scenario, death of employees or customers.
Further evidence of the potential for “business
interruption” losses caused by Ebola is the fact that
insurers are offering products targeted at losses from
this Ebola outbreak. As of October 2014, Lloyds of
London is offering business interruption coverage to
“facilities such as hospitals, hotels, airports, shopping
centers, restaurants, theaters and gyms” or any other
business that may be forced to shut its doors because
of an Ebola outbreak.12 Even more recently, insurers
started to exclude Ebola-related claims from new
and renewal policies for policyholders “that have
foreign travel exposure to certain African countries.”13
And, while it is still unknown whether this coverage
will be needed, these programs and exclusions are
helpful to the extent they will serve as a model for
insurers to respond for future pandemics.
12www.ibamag.com/news/insurance-companieslaunch-regulatory-business-interruption-ebolacoverage-19871.aspx.
13http://fpn.advisen.com/
fpnHomepagep.shtml?resource_
id=2269396521333472220&userEmail=trowe@
tresslerllp.com#top
>> Comments by Tressler
Admittedly, the connection between the current Ebola outbreak and first-party property insurance claims is not
immediately clear. However, history has shown that the fear of a pandemic, whether warranted or unwarranted,
can be worse than the actual danger posed to health and safety. While the current Ebola outbreak may not
cause direct physical loss to property, research has shown that “secondary impacts” related to a pandemic event
could cause actual damage. Also, business owners can suffer further financial loss when people stay away from
the business for fear of contracting the Ebola virus or when they are forced to stay away because of mandatory
evacuations or curfews. While the current Ebola outbreak, hopefully, will not reach pandemic proportions, it does
present ripe opportunity to consider insurance coverage issues related to pandemic events.
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First Party Property Insurance >> Law Alert
November 3, 2014
>> Our Property Attorneys
John W. Carver, Partner................................... Chicago Office...........................................Tel: 312.627.4061 | jcarver@tresslerllp.com
Amber C. Coisman, Partner............................. Chicago Office.......................................Tel: 312.627.4163 | acoisman@tresslerllp.com
Joanna L. Crosby, Partner................................ Newark Office...........................................Tel: 973.848.2908 | jcrosby@tresslerllp.com
Richard D. Heytow, Senior Counsel.................. Chicago Office.........................................Tel: 312.627.4055 | rheytow@tresslerllp.com
Katherine K. Liner, Partner............................... Orange County Office................................. Tel: 949.336.1212 | kliner@tresslerllp.com
Mohammed S. Mandegary, Partner................ Orange County Office.................... Tel: 949.336.1232 | mmandegary@tresslerllp.com
Elizabeth L. Musser, Partner............................ Los Angeles Office.................................. Tel: 310.203.4855 | emusser@tresslerllp.com
Todd S. Schenk, Partner................................... Chicago Office..........................................Tel: 312.627.4151 | tschenk@tresslerllp.com
Evan B. Sorensen, Partner............................... Orange County Office..........................Tel: 949.336.1201 | esorensen@tresslerllp.com
Christopher H. Westrick, Partner..................... Newark Office....................................... Tel: 973.848.2905 | cwestrick@tresslerllp.com
Paul S. White, Partner..................................... Los Angeles Office..................................... Tel: 310.203.4822 | pwhite@tresslerllp.com
Michael A. Conlon, Associate.......................... Chicago Office........................................ Tel: 312.627.4206 | mconlon@tresslerllp.com
Katherine A. Hercher, Associate....................... Chicago Office........................................Tel: 312.627.4187 | khercher@tresslerllp.com
William Michael Mooney, Associate................ Chicago Office...................................... Tel: 312.627.4015 | wmooney@tresslerllp.com
Ann E. O’Connor, Associate.............................. Chicago Office.......................................Tel: 312.627.4162 | aoconnor@tresslerllp.com
Jeanne S. Kuo Riggins, Associate..................... Los Angeles Office.................................... Tel: 310.203.4813 | jriggins@tresslerllp.com
Todd M. Rowe, Associate................................. Chicago Office............................................ Tel: 312.627.4180 | trowe@tresslerllp.com
Kathleen G. Williams, Associate...................... Newark Office....................................... Tel: 973.848.2912 | kwilliams@tresslerllp.com
>> Locations
CHICAGO (HEADQUARTERS)
Willis Tower: 233 South Wacker Drive, 22nd Floor, Chicago, IL 60606 - Tel: 312.627.4000 | Fax: 312.627.1717
CALIFORNIA
Los Angeles: 1901 Avenue of the Stars, Suite 450, Los Angeles, CA 90067 - Tel: 310.203.4800 | Fax: 310.203.4850
Orange County: 18100 Von Karman Avenue, Suite 800, Irvine, CA 92612 - Tel: 949.336.1200 | Fax: 949.752.0645
NEW JERSEY
Newark: 744 Broad Street, Suite 1510, Newark, NJ 07102 - Tel: 973.848.2900 | Fax: 973.623.0405
NEW YORK
One Penn Plaza, Suite 4701, New York, NY 10119 - Tel: 646.833.0900 | Fax: 646.833.0877
OTHER ILLINOIS
Bolingbrook: 305 West Briarcliff Road, Suite 201, Bolingbrook, IL 60440 - Tel: 630.759.0800 | Fax: 630.759.8504
Park Ridge: 22 South Washington Avenue, Park Ridge, IL 60068 - Tel: 847.268.8600 | Fax: 847.268.8614
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This alert is for general information only and is not intended to provide and should not be relied upon for legal advice in any particular circumstance or fact
situation. The reader is advised to consult with an attorney to address any particular circumstance or fact situation. The opinions expressed in this alert are
those of the author and not necessarily those of Tressler LLP or its clients. This alert or some of its content may be considered advertising under the applicable
rules of the Supreme Court of Illinois, the courts in New York and those in certain other states. For purposes of compliance with New York State Bar rules, our
headquarters are Tressler LLP, 233 S Wacker Drive, 22nd Floor, Chicago, IL 60606, 312.627.4000. Prior results described herein do not guarantee a similar
outcome. The information contained in this newsletter may or may not reflect the most current legal developments. The articles are not updated subsequent
to their inclusion in the newsletter when published. | Copyright © 2014
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